Ontario is holding a lottery for cannabis stores on Friday. Here’s what the rest of the country tried and how it turned out

Toronto Star 10 Jan 2019 at 19:24

Sports

Anywhere from 6,000 to 8,000 entrants, experts believe, are drawing straws on Friday for the chance to open a cannabis store in Ontario. Only 25 of them will get a shot at opening for business on April 1.

The province’s lottery system is designed to keep bud mostly in the hands of the private market without overburdening Canada’s thinly stretched supply of legal weed. It’s a break from other parts of the country, where cannabis sales are largely controlled by the government.

Each province and territory has experimented with its own system of regulating, selling and supplying weed to its residents.

Alberta, Manitoba and Saskatchewan have also decided to leave cannabis retail mostly in the hands of the private sector. For that reason, prospective budtenders in Ontario should look west for advice on how to survive what has become an intensely competitive industry with tight profit margins.

“If I was an Ontario operator, I’d be looking at my counterparts in Alberta,” said Mitchell Osak, managing director of business consulting and technology services at Grant Thornton LLP.

Alberta is the next largest market using private retailers, though there are some key differences. Ontario intends from the start to restrict the number of licences it’ll issue; Alberta didn’t initially do so.

Osak said Ontario’s decision to restrict the number of cannabis stores it’ll authorize isn’t necessarily a disadvantage, given the ongoing supply shortages across the country. Going slow and steady can offer a stability less restrained retail models lack.

“There’s no point in opening 500 stores if you don’t have enough product for 500 stores,” Osak said.

Allowing an unlimited number of stores to open in Ontario, which accounts for between 40 to 45 per cent of Canada’s demand, would further strain Canada’s cannabis supply, Osak added, potentially affecting other provinces.

The 25 winners of Friday’s lottery will be spread out across the province, according to population density: Toronto has five spots, while all of northern Ontario will have just two. The lucky entrants will still have to apply through the Alcohol Gaming Commission of Ontario to open a brick-and-mortar storefront.

Going the private sale route has been touted as the best option for cannabis retail by officials in both Alberta and Ontario. Osak said it might be a better bet for the long run, but keeping cannabis stores under public ownership has its advantages, too.

“From an execution standpoint, it seems to have gone much better initially in public models,” he said. “But ultimately, it’ll grow much faster and be much better for the consumer in private-sector markets like Ontario and Alberta.”

However, there’s one major outlier: British Columbia. The entrenchment of black- and grey-market cannabis operations in B.C., as well as the sluggish rate of legal cannabis store openings, means the province has a chimera of private and public sale systems that’s been difficult to leverage.

“They have a quasi-legal illegal market,” Osak said. “They have a couple of publicly owned stores and now, recently, a couple of private (ones). So they have a mixed bag of everything.”

A lot of questions about Ontario’s cannabis licensing system remain unanswered, Osak said, especially when it comes to late penalties.

Retailers are required to submit a $50,000 letter of credit as part of their application. If they aren’t open by April 1, the Alcohol and Gaming Commission of Ontario can take $12,500 of that. Retailers who still aren’t open by April 15 will lose another $12,500. What isn’t clear is whether stores that have passed all of the necessary inspections and trained their staff appropriately could suffer these penalties if they’re faced with an unreliable supply of weed and are forced to close.

“This whole process is clouded in uncertainty,” Osak said.

Here’s a look at how the rest of Canada has handled brick-and-mortar cannabis stores and how they’ve fared since legalization:

The process: While B.C. isn’t limiting the number of private cannabis retailers, applicants must go through several steps in order to officially obtain a licence, including paying an application fee of $7,500 and receiving approval from their local government or Indigenous nation.

What worked: In B.C., most cannabis users who couldn’t go to the only provincially owned store in Kamloops had to buy from the provincially operated online store in the first two weeks of legalization. It proved immensely popular, with reports that the province was low on stock just 24 hours after launch.

Private retailers came a few weeks later, with Tamarack Cannabis Boutique in Kimberley being the first out of the gate.

What didn’t: Regulations have limited stores to selling products exclusively from the provincial wholesaler. As a result, stores cannot carry cannabis-based creams and edibles; Tamarack owner Tamara Duggan said those were some of the most popular items at her Kimberley store.

The roll-out of stores in other municipalities has been much slower, with businesses complaining that the licensing process is overly complex. In Vancouver, a hub of cannabis use where several illegal stores are still in operation, three months passed before the first two private retailers opened their doors — to long lineups from enthusiastic customers.

Jaclynn Pehota, a regulatory consultant for Evergreen Cannabis, said the process for private licensing is “not particularly intuitive or user-friendly,” and many small businesses may not have had the resources to get through.

Alberta

The process: Alberta has taken a relatively hands-off approach to selling weed, similar to their privatized system for liquor stores. Applicants looking to open a storefront must secure approval from municipal authorities and submit to an application process (which includes background checks) from the Alberta Gaming, Liquor and Cannabis Commission (AGLC).

There is no cap on the number of stores allowed within the province, although the AGLC expected to see around 250 store applications within the first year of legalization. However, privatization doesn’t extend to the internet: The only legal website to buy weed in Alberta is the AGLC-run albertacannabis.org.

What worked: Alberta had 17 storefronts open on Oct. 17. The Edmonton area alone had a dozen ready to go on legalization day, while Calgary had two. There are several possible reasons why the provincial capital outpaced Cowtown so quickly, including an existing medical cannabis industry (Aurora’s headquarters are based in Edmonton) and relaxed public consumption laws. Albertans also have a healthy appetite for bud: Nova Cannabis, a chain with stores across the province, pulled in $1.3 million in sales within the first five days of legalization.

What didn’t work: As with other provinces, Alberta’s brick-and-mortar stores and albertacannabis.org found themselves starved of weed just a month after legalization. In late November, the AGLC announced a moratorium on granting new store licences until supply issues could be resolved, saying it had only received 20 per cent of the cannabis it had ordered from licensed producers.

Several stores, including Numo Cannabis in northern Edmonton, had to close for weeks due to a lack of weed, while Urban Canna, a small chain in Calgary, found itself unable to open at all during the first month of legalization. Some Alberta municipalities have also vetoed pot stores, and Calgary has found itself bogged down with appeals against cannabis stores within city limits.

What worked: When the shops opened in cities and towns around the province on Oct. 17, there were long lines as clerks handled almost 13,000 transactions and in products. Those lines persisted at some locations for several days.

NSLC spokesperson Beverly Ware said in an email that the corporation was “very pleased with the implementation” and that it answered the public’s demand for local producers shortly after legalization. There weren’t any local licensed producers in the province on Oct. 17, but two have since received the green light from Health Canada.

What didn’t work: Several NSLC cannabis stores closed early because of shortages .

As in Nova Scotia, the rest of Atlantic Canada opted for government-run cannabis retailers. New Brunswick’s retailer, Cannabis NB, faced similar supply challenges to the NSLC and recently laid off more than 60 employees from its 20 stores.

“The decision is representative of normal new retail industry operations and long-term fiscal responsibility,” Bolduc said in an email.

Quebec

The process: The Société québécoise du cannabis (SQDC) runs 12 stores across the province, including three in Montreal and two in Quebec City. Customers can also purchase cannabis from its website.

What worked: The 12 stores were open by legalization day, and the website was live. The province’s website reported 53,300 online transactions and 84,850 in-store transactions in the first week of operation.

What didn’t work: Plagued by supply shortages, the stores are now only open Thursdays to Sundays. In addition, some customers reported receiving products with a unit weight lower than what was indicated on the packaging,

Saskatchewan

The process: Operators for 51 retail cannabis stores were selected through a two-step process that combined an open request for proposals and a lottery.

Applicants that made it through the first screening phase, which looked at financial and inventory systems, were entered into the lottery to be eligible for a permit. Independent consulting firm KPMG monitored the process, according to the province’s website.

What didn’t work: Not all of the 51 stores were open by then. Currently, only 17 are in operation; the rest are working through the permit process, and more should be issued in the coming weeks, according to a government spokesperson.

Manitoba

The process: A request for proposals went out in November 2017, looking for four initial companies. The province announced the successful retailers in February 2018.

The Liquor, Gaming and Cannabis Authority of Manitoba (LGCA) regulates, licenses, inspects and audits the industry, while the Manitoba Liquor and Lotteries Corporation (MBLL) is in charge of processing and distribution, according to the province’s website.

The private sector operates all 16 retail locations across the province, including two in First Nations communities and 10 in Winnipeg,

What didn’t work: MBLL said in October it expected supply shortages to last at least six months, as the province, along with others, is not receiving as much cannabis as it needs.

In December, the RCMP seized all cannabis from the Winnipeg-based company Bonify, saying they believed illegal cannabis had entered the market.

Nunavut

The only way to buy is to order online from private retailer Tweed, which doesn’t have any stores in Nunavut. The government did not immediately respond to a request for more detail.

Yukon

The government operates one cannabis shop in Whitehorse, as well as an online store. The government did not immediately respond to a request for more detail.

Northwest territories

The Northwest Territories Liquor and Cannabis Commission regulates the distribution of alcohol and cannabis through mail order, an online store and five brick-and-mortar locations. The government did not immediately respond to a request for more detail.

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